FCC nixes joint retransmission negotiations, JSAs
As expected in its 3/31 vote, The FCC voted 5-0 to bar broadcasters from negotiating retransmission consent deals for multiple TV stations in the same market. Under the new rules, two or more separately owned Top-4 broadcasters in the same market would be prohibited from negotiating retrans deals together.
FCC Chairman Tom Wheeler said Congress gave broadcasters the right to charge for their programming and that’s not changing. However, “All we’re doing today is leveling the negotiating table.”
Said the FCC in a statement: “The Federal Communications Commission today adopted a Report and Order that strengthens its rules governing retransmission consent negotiations. This Order will help curtail a practice that has put upward pressure on cable and Direct Broadcast Satellite programming costs as well as prices to consumers. The Communications Act requires cable systems and other pay television services to obtain a broadcast television station’s retransmission consent before carrying the station’s signal. The Act also requires broadcasters and pay television service providers to negotiate retransmission consent agreements in good faith. Today’s Order prohibits a television broadcast station ranked among the top four stations (as measured by audience share) from negotiating retransmission consent jointly with another top four station if the stations are not commonly owned and serve the same geographic market. Joint negotiation by these stations leads to higher retransmission consent fees because the practice reduces competition between the stations. Additionally, the threat of losing the programming of two or more top four stations at the same time gives the stations undue bargaining leverage in negotiations with Multichannel Video Program Distributors. To target collusive behavior effectively, the Order also defines joint negotiations. Congress passed retransmission consent legislation over 20 years ago. Since that time, there have been significant changes in the video marketplace. The FCC initiated this proceeding to respond to these changes and facilitate the fair and effective completion of retransmission consent negotiations to the ultimate benefit of consumers. Today’s action also includes adoption of a Further Notice of Proposed Rulemaking that asks whether to eliminate or modify the Commission’s network non-duplication and syndicated exclusivity rules. These rules help broadcast television stations to be the exclusive distributor of network or syndicated programming within a certain geographic area.”
Said NAB EVP Dennis Wharton, in response: “It’s important to note that broadcasters have engaged in thousands of successful retransmission consent negotiations with pay TV providers over the years. Never has a local TV station been found by the FCC to have negotiated in bad faith. “We would also note that broadcasters are not responsible for higher pay TV bills. Pay TV companies have been raising rates more than twice the rate of inflation for the last 20 years, according to Consumer Reports. The notion that a punitive crackdown on local TV stations will lead to lower cable rates is simply not credible.”
DirecTV issued a statement in support: “The FCC’s decision today is a win for consumers. By restricting broadcasters’ ability to collude in retransmission consent negotiations, the FCC took an important first step to protect consumers from local channel blackouts and higher prices. DIRECTV appreciates the FCC’s efforts and hopes to work together for additional reform in the near future.”
As did NABOB: “Today the Federal Communications Commission adopted a new policy for the treatment of Joint Sales Agreements (“JSAs”) between television stations in the same market, which is very similar to a proposal that NABOB suggested previously. The new policy will treat all JSAs as attributable to the station that is operating the JSA. Therefore, if the JSA operator would not be able to own the second station under the FCC’s ownership rules, it will not be able to operate the JSA without a waiver of the attribution rule. In order to obtain a waiver, the JSA operator must demonstrate that a waiver will serve the public interest. The new rule has two aspects that might benefit minority entrepreneurs. First, JSA operators might be able to demonstrate that the public interest will benefit from a waiver, because a minority owner will be able to develop a station into a successful business operation bringing diversity of ownership to a market. Second, if the JSA operator chooses not to make a public interest showing to obtain a waiver, the station that was under a JSA might be placed on the market and a minority owner might be in position to purchase the station. NABOB is pleased to see this new policy, and we look forward to working with the FCC and broadcasters to develop JSA proposals that will be able to obtain the necessary waivers.”
…and the American Television Alliance (ATVA): “We applaud the FCC for taking steps to curtail the problem of coordinated retransmission consent negotiations by top-4 broadcasters. These dubious, anti-competitive arrangements have allowed broadcasters to collude and threaten blackouts of two or more top stations in a market. Today’s ruling will help defend consumers around the country from blackouts and higher prices.”
The FCC also ruled by a 3-2 vote along party lines that TV broadcasters may not form new JSAs where one station sells 15% or more of ad inventory of another separately owned station in the same market. Basically, that means all same-market television JSAs for more than 15% of ad time are attributable for purposes of the broadcast ownership rules. Also under the new rules, existing JSAs would be required to unwind within two years, unless broadcasters in each case can persuade the FCC that a particular arrangement genuinely serves the public interest and that the stations are truly independent or each other. The Commission said the Media Bureau will consider certain waiver requests.
Said the FCC in a statement: “The Federal Communications Commission today took steps to close a loophole in its TV ownership rules, making sure that a party’s interests in a market are properly counted. Removal of the loophole helps ensure competition, localism, and diversity in local broadcast markets by preventing a practice that previously resulted in consolidation in excess of what is permitted under the Commission’s rules. A JSA, or joint sales agreement, is between two stations in the same market in which one station is authorized to sell advertising time on the other station. The Commission’s radio rules have long recognized that these agreements create an ownership interest when the JSA allows for the sale of 15% or more of the advertising time on a competing local station. Today’s Report and Order applies this same standard to broadcast television. Parties to existing TV JSAs will have two years to come into compliance with the applicable local ownership limits. Waiver requests, considered on a case-by-case basis, must show that strict compliance with the rule is inconsistent with the public interest. Also adopted today was a Further Notice of Proposed Rulemaking that initiates the Commission’s 2014 Media Ownership Quadrennial Review and incorporates the ongoing 2010 Quadrennial Review record. The FNPRM asks for new and additional information on current market conditions to ensure a comprehensive and refreshed record. The current ownership rules remain in place while the review is pending. The FNPRM additionally asks for comment on whether commercial television stations should be required to disclose shared service agreements and how best to achieve disclosure. An SSA allows same market stations to share resources, such as employees, administrative services, or hard assets, such as a news helicopter. The Further Notice of Proposed Rulemaking also recommends reinstatement of the Commission’s revenue-based “eligible entity” standard, finding that the program would support new entry into the broadcast industry by small businesses.”
So, the 2014 quadrennial media ownership review is officially launched. The Media Bureau’s proposal kept ownership caps the same, but the agency said it would consider doing away with the radio-newspaper and radio-TV cross-ownership limits. Larry Patrick, Patrick Communications Managing Partner, tells us it’s to little and too late: “I do not think that the lifting of the radio-newspaper cross-ownership restriction will do very much for either industry. It is far too little and 25 years too late. There may be some station groups who think they can save a local newspaper but most are intent on burying them with their own digital offerings as well as on-air presentation. In one of my own markets, the paper publishes on Tuesday and Thursday. We always scoop them on stories days before they go to press. No real interest here on considering a purchase or partnership. For the most part, this move to allow radio stations and newspapers to join together is too little, too late.”
Said NAB EVP Dennis Wharton, regarding the vote to attribute JSA’s for the purpose of its ownership rules and forced broadcasters to unwind those deals within 2 years: “For a decade, Republican and Democratically-controlled FCCs have approved JSAs, which allow free and local TV stations to survive in a hyper-competitive world dominated by pay TV giants. That model is now declared illegal, based on the arguments of pay TV companies whose collaborative interconnect advertising sales practices make JSAs seem pale by comparison. It’s disappointing the FCC would take this action without first completing its 2010 statutorily mandated media ownership review. As the record before the Commission clearly shows, the public interest will not be served by this arbitrary and capricious decision.”
Bill Fanning, CFA, Managing Director Media Venture Partners, gave RBR-TVBR these takeaways from the day:
“- Disappointing but not surprising, the commission’s hits to broadcasters keep on coming.
– With regards to the retrans negotiations, Dennis Wharton’s comments are spot on. Broadcasters and pay-TV providers (cable & satellite) have for years successfully negotiated scores of these agreements, in what had, up until recently, been viewed as private market solutions. It’s interesting to see that the FCC now felt the need to inject themselves into these private negotiations. Sure, there were some disruptions from time to time, but that is normal in business negotiations across most industries. I find the chairman’s comments about “leveling the playing field” ironic as in many cases, in mid-size and smaller markets you’ve got really one or two dominant cable systems that the broadcasters must each negotiate with and the leverage really sits on that side of the table. Additionally, to try and depict the retrans negotiations for Big 4 affiliates as the primary driver of higher consumer bills is misleading. Take a look at the aggregate retrans costs for Big 4 affiliates in a given market relative to what the MSO’s pay for other content – ESPN, regional sports networks, other cable channels, etc. – it’s not even close.
– The FCC is correct – JSA’s have historically been creative ways around the current ownership rules. However, the core problem is that these are antiquated rules being enforced in a very different media environment than when they were first instituted. The number of options that consumers have today to receive news, information and video entertainment is enormous and growing every day. Therefore, to say that having one entity controlling multiple Big 4 affiliates in a given market is a real harm to the consumer, is a stretch.
– Additionally, the JSA is a structure that the FCC has approved for years. From an economic perspective, one of the key points is that acquirers of television stations built their business models and justified purchase prices based on these structures, with the reasonable expectation that the regulatory approvals (explicit or implicit) they received provided assurance that these structures would be allowed to continue indefinitely. To now have to go back and unwind these will greatly harm broadcasters who previously transacted on this basis.
– It will be interesting to see how the JSA unwind actually plays out. The two year window will take us into 2016 and we may just see broadcasters try to delay and push things out past that two year window in the hopes of getting relief on this ruling from a future administration.”
Francisco Montero, Managing Partner Fletcher, Heald & Hildreth, P.L.C., tells RBR-TVBR: “If Wheeler’s concern is maintaining separate editorial voices and Congress’s objective in the Quadrennial Review process is requiring that the FCC ascertain what multiple ownership rules are still necessary, I do not see where the Commission’s actions today further either objective.”
David Oxenford, Partner, Wilkinson, Barker, Knauer, LLP, tells RBR-TVBR: “One issue that you don’t seem to address is that the FCC said that they would entertain waiver requests to allow existing JSAs to remain in place if a proponent can show that they further the public interest – the interests of diversity, competition, and localism. While Commissioner Pai said that the waiver standards were not well articulated, were in fact “mush”, the Media Bureau did commit to move quickly on such requests, resolving them in 90 days of the completion of the record on the request (which I assume means after the request has been filed and public comment has been received). It will be very interesting to see how these waiver requests are processed, and if any real relief is in fact granted. On all of the other issues, including small market TV duopoly and newspaper-broadcast cross-ownership, the FCC has effectively punted, pushing all those issues two years down the road. I’ve heard many suggest that the newspaper-broadcast cross-ownership rules may well outlive the newspaper, and that certainly may be the case. In fact, Commissioner O’Rielly showed some charts that seemed to back up that view. Will broadcasters be able to wait a full two years before there is any potential for relief on these issues?”
Rep. Anna G. Eshoo (D-Calif.), Ranking Member of the Communications and Technology Subcommittee: “More than 20 years after Congress passed the 1992 Cable Act our video marketplace is in desperate need of reform, and today the FCC made progress. The FCC’s action to curtail the use of coordinated retransmission consent negotiations means that broadcast stations with the most market power can’t team up against pay-TV providers for leverage during negotiations. This is an important step toward rebalancing the playing field and ultimately protects consumers from unacceptable blackouts and increased rates. I’m also pleased that the Commission is moving forward with its review of our nation’s broadcast ownership rules while taking steps to close existing loopholes. While other FCCs allowed side car agreements to grow leaps and bounds, the public was left in the dark. These agreements lack total transparency and the result has been contrary to what FCC’s rules call for. I appreciate the FCC’s long overdue action today to enforce the media ownership rules, even though the previous Commission failed to complete the 2010 Quadrennial Review. I’m pleased that Chairman Wheeler will not only complete the 2010 review but has committed to rolling in the 2014 review and getting their job done. As demand for mobile broadband skyrockets, the FCC’s actions to free up additional spectrum for unlicensed and licensed services is a win for consumers. It supports greater competition, it improves mobile services, and it enhances innovation.”
The Commission did not consider NAB CEO Gordon Smith’s compromise offer. Smith had requested that the Commission should create an exemption from JSA attribution and processing guidelines that would permit broadcasters to continue operating pursuant to existing JSAs – and enter into new JSAs – provided that they disclose all arrangements to the FCC and satisfy the criteria below:
I. Meet Standards that Establish Licensee Control of Programming, Personnel and Finances
Licensee must control at least 85% of programming.
Licensee must retain at least 70% of net advertising revenue (i.e., sales agent may obtain a commission no greater than 30% of the net advertising revenue of the other station).
Licensee must retain ultimate control over rates charged for advertising.
Licensee must retain option to hire its own advertising sales staff or retain other sales services (non-exclusivity).
II. Demonstrate Public Interest Benefits
Parties must demonstrate clear and specific public interest benefits, including but not limited to one or more of the following:
promotion of localism through provision of local news, weather and emergency information, public affairs, sports, and/or entertainment programming;
promotion of diversity by expanding ownership opportunities for new entrants, including women and minorities, in broadcasting;
provision of programming (whether local, regional or national) intended to serve traditionally underserved or niche audiences, such as racial and ethnic minorities, foreign language speakers, children, older persons and/or religious groups;
making possible capital investments and technical improvements that improve service;
enabling one or both stations to provide additional and/or innovative services, such as multicasting, mobile or online;
aiding a financially struggling station, preventing lay-offs of personnel, particularly news staff, or imminent cut-backs in local programming and service; and/or
such other unique public interest benefits identified by JSA participants and approved by the Commission.
The Commission can establish an enforcement mechanism and deadlines to ensure that specified benefits are delivered to the public, and require the attribution of JSAs that do not comply with applicable standards.
The Commission also asked for comments on whether TV stations should be required to fully disclose details about other forms of SSAs and whether additional regulations should be imposed on SSAs.
The FCC’s current ownership rules prohibit broadcasters in small and medium markets from owning more than one stations. Overall, they may own two as long as one of the stations in not among the market’s top-four rated, typically one of the big-four network affiliates.
Noted Marci Ryvicker, Wells Fargo Securities Senior Analyst: “There weren’t too many surprises during the FCC’s March Open Commission meeting, which was held from 10:30 am to 12:45 pm eastern today (3/31). There were several items discussed involving both wireless and broadcast – clearly the broadcast part was of most interest to us given the potential changes to the landscape that have been feared since Chairman Tom Wheeler took office in November 2013. BOTTOM LINE: Our quick take from today’s webcast is that there really were no surprises re. JSAs or retransmission consent. Although we were a bit disappointed with the few changes proposed by the 2014 Quadrennial Ownership Review, we found the “Q&A” with Media Bureau Chief Bill Lake quite interesting. We describe our quick takes below.
• ITEM #1 – Report & Order on Retransmission Consent Rules – This regulation prohibits the joint negotiation of retransmission consent on behalf of two of the top 4 rated television stations in the same market (i.e. ABC, CBS, FOX and NBC) and was ADOPTED in a 5-0 vote. Interestingly, there is no proposed ban on joint negotiations for non-top rated stations, BUT the FCC will look into this at a future date should it be deemed necessary.
• ITEM #2 – A Further Notice of Proposed Rulemaking – This regulation proposes elimination or modification of the network non-duplication and syndication exclusivity rules and is expressly meant to level the playing field with regards to retransmission consent negotiations. The Commission is NOT suggesting that broadcasters should NOT get paid for their signal, but there is clear concern with regards to the growing price of pay-tv bills. It was clear to us that the FCC is blaming a lot of this growth on retransmission consent (we continue to believe that sports and cable nets play a big role as well – hopefully to be addressed in telecommunications laws at some point in the future). Along with the Report & Order on Retransmission Consent rules, this Further Notice of Proposed Rulemaking was adopted 5-0.
• ITEM #3 – A Further Notice of Proposed Rulemaking initiating the 2014 Quadrennial Media Ownership Review. Interestingly, this did incorporate the record from the 2010 review (we had not expected this). This has three parts. 1) It seeks input on steps to improve and encourage ownership diversity including small businesses. 2) It seeks info on transparency re. sharing agreements (i.e. SSAs). And 3) it encompasses a Report and Order closing the JSA “loophole”. Basically, the Quadrennial Ownership review isn’t doing much to relax the rules for broadcasters, as it continues to support the Duopoly Rule, the 8 Voices Test and the newspaper-television cross ownership ban. On the flip side, it does propose to eliminate the newspaper-radio cross ownership ban. The SSA part is asking for more disclosure of these sharing arrangements so that they can be evaluated in the future (this is the most vague issue and does suggest there could be more regulation here at some point). Lastly, closing of the JSA loophole was exactly as expected – those groups that sell 15% or more of the licensee’s ad time have 2 years to restructure or unwind these agreements.
• “Q&A” with Bill Lake re. waiver process was interesting. He described 3 circumstances. 1) No change in ownership (i.e. cost sharing, but no M&A involved) – should be able to move quickly on waivers. 2) An acquisition of a second in-market station with no financial entanglement is complicated, but the more complete the record, the faster waivers can be granted. And 3) JSAs where complete financial control is transferred will be VERY tough to get through.”
RBR-TVBR observation: Like Fanning said, the JSA is a structure that the FCC has approved for years. From an economic perspective, one of the key points is that acquirers of television stations built their business models and justified purchase prices based on these structures, with the reasonable expectation that the regulatory approvals they received provided assurance that these structures would be allowed to continue indefinitely. To now have to go back and unwind these will greatly harm broadcasters who previously transacted on this basis. Round up the lawyers, we say, as harm can easily be shown here.
This move also may conflict with the STELA reauthorization bill, already passed by The Communications and Technology Subcommittee. In it, Rep. Anna Eshoo (D-CA) offered an amendment: “The Commission may not modify its rules to treat any shared service agreement, local news service agreement, local marketing agreement, or joint sales agreement (as such terms are discussed by the Commission at paragraphs 195 and 196 of the Notice of Proposed Rulemaking adopted on December 22, 2011 (FCC 11–186)), or any similar agreement between television broadcast stations in the same local market, as resulting in the attribution of a cognizable interest in, or ownership, operation, or control of, a television broadcast station for purposes of the Commission’s local television multiple ownership rule (47 CFR 73.3555(b)) until the Commission issues a single order that addresses all of the Commission’s media ownership rules that are required to be reviewed quadrennially under section 202(h) of the Telecommunications Act of 1996; and closes the proceeding relating to the 2010 quadrennial review under such section.”
It now goes to the full House Committee on Energy and Commerce. If passed as is, there could be a showdown here to come with the Commission, although Eshoo herself seems satisfied with Wheeler’s statement that he will complete the ownership review.
Now many larger broadcasters, such as Sinclair will be forced to unwind the agreements that don’t meet these requirements within two years or face a potential violation of the FCC’s media ownership rules. We were at least hoping the FCC world grandfather those JSAs currently in existence. Otherwise, this move is going to be devastating to the TV broadcast industry and send their stocks down–even further than they already have been in anticipation of this nightmare. In many markets where JSAs exist, there isn’t enough revenue there (retailers, car dealerships, etc) to run a TV station without help from SSAs and JSAs. It will ultimately hurt the viewer, because their NBC, ABC, CBS, Fox, CW or MyNetwork affiliate will disappear. Broadcast groups will have to completely change their business plans and a lot of people will lose their jobs—because these companies need to make a profit to survive. Thanks to the Commission in its efforts to disrupt local broadcasting—as if they don’t already have enough regulation on their backs. We’re pretty sure Tom The Cable Guy will approve the Comcast merger with Time Warner Cable next.